How No Fault Insurance Works

Learn more about no fault insurance. A low profit margin, 1 per cent, is allowed by the insurance commission for selling compulsory insurance. Because insurance is compulsory, and the automobile owner is forced to buy this product, an artificial demand is created. On non-compulsory insurance, the profit level is generally left at 5 per cent. A good argument can be made for allowing no profit at all on compulsory insurance. Compare cheap sr22 insurance.
Even without a profit, because the public is forced to buy this coverage, the companies would have the use of a tremendous pool for investment purposes, in what amounts to an interest-free loan, as it does at present. Premiums are paid in advance by the insured, and the longer that claim payments are forestalled, the greater the opportunity to use these funds as investment capital.

The remainder of the expense ratio is consumed by operating expenses such as rent, salaries, and equipment. By 1970, the total loss ratio combining claims and expense factors rose to a figure in the neighborhood of 103 per cent. Translated, this means that, for every $100 taken in by the companies for compulsory personal injury insurance, $103 was paid out in the form of either claim payments or expenses. The result is an underwriting loss, which the companies point to receive a rate increase for the following year. But despite this paper loss, the companies still made money.

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The companies were using the greatest part of $153 million in premiums to invest and reinvest. It is the return on these monies, particularly when stock market conditions are good, that resulted in the companies’ operating in the black for compulsory insurance. Due to the market decline in the late 1960’s, the companies by 1970 were no longer becoming rich on their investments. On the other hand, they were not losing money on compulsory insurance. The net return on these investments still approximated 7% per cent per year. Get sr22 insurance quotes online!

In summarizing the impact of investment return to the companies, Massachusetts Insurance Commissioner said: Let there be no doubt that investment income deserves the attention given to it in recent years. It ought to be noted that on a national basis for the ten-year period between 1960 and 1969, the stock insurance companies showed a statutory under-writing loss of $1.3 billion before taxes, but an investment profit of $11.7 billion before taxes. These statistics help focus the issues. It shows that, even where no underwriting or insurance profits are earned, companies have the ability to make profits from money they receive from investors and premium payers.

When the rate-makers tried to set adequate and fair rates for a no-fault system, as we said, they used statistics based entirely on the performance of the tort system. In adjusting these figures for the anticipated impact of no-fault on the insurance rate, two calculations were made, both of which turned out to be wrong. The first inaccurate prediction concerned claims frequency.

It had been anticipated that the changeover to a no-fault system would increase claim volume by 30 per cent, because of the additional number of injured motorists now eligible for no-fault benefits. No-fault, designed to pay everybody, included many individuals who had been disqualified, under the tort negligence system, by some legal barrier from successfully making a claim.